Retail

OfficeMax swings to a profit but cuts outlook; shares drop

NEW YORK (MarketWatch) -- Office-supplies retailer OfficeMax Inc. swung to a second-quarter profit Tuesday after cutting costs and inventory theft and loss to offset declining sales, but lowered its full-year sales forecast.

"When we put together our plan this year, we expected the first half to be tough and we'd see modest recovery in the second half," said Bruce Besanko, chief financial officer and chief administrative officer, in an interview. "Our business is tied to white-collar unemployment. To the extent that white-collar unemployment remains high, our business remains challenging."

The company said it expects third-quarter sales to fall, even after factoring in the favorable impact of foreign currency translation. For the year, OfficeMax projected sales will be flat to slightly lower, instead of its previous estimate of a rise in sales.

The adjusted operating income margin rate, a measure of profit, will be higher than it was in 2009, but the improvement will be significantly less than it was in the first half.

In the face of uncertain sales, OfficeMax has closed one of its call centers in Wyoming to lower costs. It has also revamped its website to bolster sales, the finance chief said.

To boost profit, the company has centralized its decision-making on prices. It also has used analytics tools to help it better negotiate a contract price and has been able to pass on commodity-cost increases to its contract customers, Besanko told MarketWatch.

On a positive note, he said off-contract sales, which are more profitable, have shown a small pickup, while sales of larger-ticket items such as furniture posted a smaller rate of decline.

For the second quarter, OfficeMax reported net income of $11.8 million, or 14 cents a share, compared with a loss of $17.7 million, or 23 cents a share, in the year-earlier period. Sales slipped to $1.65 billion from $1.66 billion, the Naperville, Ill.-based company said Tuesday.

Excluding one-time items, the company said it would have earned 12 cents a share. Analysts, on average, expected OfficeMax to break even on sales of $1.67 billion, according to FactSet Research.

Contract segment sales fell 0.1% to $880.5 million and would have dropped 4.1% excluding the currency impact. Contract sales dropped 3.6% in the U.S., but rose 8.7% outside the U.S. Gross margin in the unit widened to 22.7% from 20.6%, helped in part by lower delivery costs.

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